Sunday, November 18, 2012

Patent deals will exacerbate Android fragmentation unless Google secures global licenses

One week after the surprise announcement of Apple's license deal with HTC, I want to take a closer look at some of the implications. In this post I'll address two issues that Android already has, but which are exacerbated by these vendor-specific deals: fragmentation of the platform and "frenemy" relationships between Android device makers. In a subsequent post I'll talk about Apple's patent strategy in light of its huge challenges to preserve shareholder value after already having strategically lost such key markets as China and Germany to Android. As AFP wrote today, "Google's Android is eating Apple's lunch", and my opinion is that if Apple can't fend off Android, it won't even be a top five IT company (by volume as well as value) in five years' time.

There are various tactical and practical reasons for which it makes sense for third-party patent holders like Apple, Microsoft and Nokia to collect royalties from, and bring litigation (if needed) against, device makers rather than Google itself. 15 vendor-specific license deals have been announced already, and dozens more will fall into place over the next year or two. Nothing provides better validation to that approach than Google's litigation tactics in the Oracle/Java case. But those right holders primarily seek to protect their intellectual property while it's in Google's interest, and Google's responsibility more than anyone else's, to care for Android. And for Android, these vendor-by-vendor patent license deals are clearly a suboptimal solution. The best way forward for Android would be for Google, as the creator and main beneficiary of the platform, to negotiate global (in the sense of "benefiting all device makers alike") license deals with right holders.

Desire to differentiate leads to fragmentation, and patent licenses are another means of differentation

A multi-vendor platform like Android needs to strike a balance between two conflicting goals: on the one hand, there must be consistency and compatibility, but on the other hand, there must be differentiation. From Google's perspective, price competition among Android OEMs is key, but device makers don't want to engage in what would only be a race to the bottom, so they also look for product differentiation. Differentiation at the hardware level would be in Google's interest, and it certainly works for a company like Samsung, but Google also told OEMs that they could differentiate, within limits that Google unilaterally imposes and reserves to change anytime, at the software level.

The week before Google announced the $12.5 billion Motorola Mobility deal, MMI's then-CEO Sanjay Jha told investors (who were concerned about MMI's ability to compete with Samsung, HTC and others) the following:

"I would bring up IP as very important for differentiation (among Android vendors). We have a very large IP portfolio, and I think in the long term, as things settle down, you will see a meaningful difference in positions of many different Android players. Both in terms of avoidance of royalties as well as potentially being able to collect royalties. And that will make a big difference to people who have very strong IP positions."

After he said this, things changed for MMI because Google bought it and it's now still embroiled in litigation with Apple and Microsoft. Today, if there's one device maker that really could benefit from the Android patent mess, it's HTC. In addition to a license deal with Microsoft, which most of the Android market has by now (with Google's Motorola Mobility being the only significant company to refuse to pay), HTC is the first Android device maker to have a deal in place with Apple. There may be some restrictions under that deal, but still, there's no question that HTC now has the right to implement certain technologies patented by Apple that other Android OEMs must work around or they risk being (or are already being) sued. For one example, HTC may now be allowed to reimplement the famous "overscroll bounce".

It's possible that HTC got particularly sweet terms from both Apple and Microsoft by virtue of having been the first Android OEM to sign a license deal with them. This could help HTC in financial terms, but in Apple's case it's also possible that other Android OEMs will face more restrictions concerning the functionality they can implement.

There are two kinds of Android fragmentation: inconsistent user interfaces and incompatible application programming interfaces (APIs). The overscroll bounce example is in the first category. There are already some API incompatibilities. For example, Samsung customers (I'm one of them) have access to special Samsung apps that won't run without Samsung's TouchWiz extension. And Amazon's Kindle Fire also comes with a modified API: if you installed an Android app on it from another source than Amazon's own app store, it might work just fine, but there's no guarantee that it will.

API fragmentation is the worst kind of fragmentation. But many of the patents that are asserted against Android cover functionality the operating system provides to applications. If unlicensed vendor A has to work around such a patent while vendor B is licensed, this can result in inconsistent and ultimately incompatible APIs.

There's already one example of an API-related workaround: on Thursday, Motorola Mobility's counsel told a German appeals court that four months after Microsoft began to enforce an injunction over a multi-part text messaging (SMS) layer patent, his client relaunched its products in the German market with a modified operating software that, in Motorola's and its lawyers' opinion, steers clear of infringement. This is an API patent, and while the number of apps that use text messaging is limited, it's at least doubtful whether existing Android apps relying on the standard Android API -- which was held to infringe -- still run on the modified version. Microsoft has also won another German injunction over an API-related patent ("soft input panel").

Should Motorola Mobility have altered the Android API only to keep selling its proucts in Germany despite an injunction, Google itself (considering that Google micromanages Motorola Mobility's patent litigations) would actually have fragmented the Android API, instead of joining all of the other major Android device makers who have licensed the relevant patent.

The need to preserve API consistency should all by itself be enough of reason for Google to work toward global patent license deals that benefit all Android OEMs.

The divisive effect of vendor-specific patent deals on the Android ecosystem

If HTC had a Facebook relationship status, it would have had to switch it a week ago from "Open marriage with Google" to "It's complicated".

It took less than a week for the first Android-internal conflict to result from the deal. Samsung requested access to the Apple-HTC license agreement, hoping that they can leverage its terms against Apple's irreparable harm theory.

In my post on that motion I said that HTC obviously won't want a competitor like Samsung to know its terms, such as the license fees it has to pay. But the problem is much more fundamental than that. It would actually be in HTC's interest if Apple won an injunction against Samsung (or any other Android device maker). HTC is licensed for ten years. Whatever the terms are, they won't depend on the outcome of any pending or future litigation. But the rest of the Android ecosystem is not, and the more successfully Apple enforces its rights against those other companies, the better for HTC.

As I said, it's complicated. There comes a point at which HTC would have to be concerned that the Android platform as a whole is in peril. But we're far from that point, and over the next few years, HTC's number one concern is not the size of the overall Android cake, but the size of its piece of that cake.

In any industry, if a company has a license to a patent (or patent portfolio), it isn't interested anymore in the invalidation of those patents (unless its license agreements provides for termination, or for an adjustment of terms, because of invalidation, which is usually not the way these days are done). Instead, it hopes for that patent to stay around for much longer so it will hurt as many of its competitors as possible.

HTC was sued by Apple over 32 U.S. patents plus several European patents, most of which were or are also being asserted against other Android device makers. Android device makers collaborate closely with Google in their defense against Apple's patent assertions, and HTC will undoubtedly have received a wealth of information from Google and other OEMs about how to defend against those assertions. Now that a license deal has completely changed HTC's situation, it would even make business sense for HTC to secretly help Apple against other Android OEMs, such as by making Apple aware of prior art references that the Android camp identified. If Apple found out about a prior art reference early on, it would have more time to develop its counterarguments, and in some cases it might even decide to withdraw a part (or refrain from asserting it in the first place) if there's an incredibly strong prior art reference in place that Apple wasn't previously aware of, focusing instead on those patents the Android ecosystem can't easily invalidate.

There will be some confidentiality obligations on HTC's part vis-à-vis Google and possibly other Android OEMs, and it's also possible that Google shared certain information only with the Quinn Emanuel law firm and not with HTC itself. But HTC may have information that would be useful to Apple, and prior art references must be public material by definition (published patent applications, books, articles, products), which is very difficult or may even be impossible to protect through non-disclosure agreements.

I don't know whether Apple viewed the HTC deal as part of a divide-and-conquer strategy. But it's a fact that there is now one major Android device maker who will actually hope that Apple wins as many lawsuits as possible, and the most drastic remedies available, against Samsung, Motorola Mobility and others.

I'm not saying that HTC will actually lend support to Apple. Considering that Google didn't really lend meaningful support to HTC (for example, the patents it gave to HTC to assert against Apple didn't have any impact because Google retained too far-reaching rights in them), HTC doesn't owe Google anything. Actually, Google is indebted to HTC because of what it did for Android early on.

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